Introduction

For beginners, entering the stock market can be a thrilling yet challenging experience. The stock market seems to be very complex for those viewing from outside but once you are aware of the basic rules of investing, there is no better way than investing in the stock market to grow your money.

Let’s look at some of the basic rules of investing of in stock market that everyone needs to abide by:

Basic rules of investing in stock market 

#1. Invest in businesses you understand 

One thing to always keep in mind is to never invest in a stock. Invest in business. And investing in a business means knowing what the company does.

You cannot predict the performance of a stock, but you can definitely predict how a business is going to perform in the coming future if you are aware of the industry that it operates in and how the company generates revenue.

Therefore, you must avoid a stock if you don’t understand the business of the company. 

#2. Do not rely on “tips” and avoid herd mentality 

As a beginner, you might be tempted to invest in stocks that the other investors are buying and selling. But following herd mentality is the reason behind formation of bubbles in the stock market.

You might also get lured by tips and advice given by your friends or colleagues.

However, falling to such tips will only put your portfolio at risk. Always do your own research and understand how the market works. Stay updated with the latest financial news and invest by combining it with your own research. 

You can always walk up to your financial advisor for help but do not rely on them completely.

#3. Be disciplined and control your emotions 

If you look at the history of the stock market, even during greatest bull runs there have been moments of panic. Due to the volatile nature of the market, the undisciplined investors have lost money despite the great bull runs.

Due to inability to control their emotions, investors buy shares of companies without knowing the risks involved and suffer in the long run. The same investors become anxious and sell good stocks at lower prices during a bearish market.

However, those investors who follow a disciplined approach and put their money systematically in the right shares and hold to their investments patiently generate outstanding returns.

#4. Invest for the long-term

Instead of thinking of the stock market as a tool to make quick money in the short-term, think of it as a long-term investment option. 

We all have heard the formula to make money in the stock market i.e., buy low and sell high. But this is not very easy to implement because we cannot predict whether the stock will rise or not. 

Even if you manage to buy low and sell high in the short-term, you will probably miss out on the potential returns just because you sold the stock prematurely.

Stock market returns outperforms other asset classes if you hold your stocks for the long-term.

#5. Do not try to time the market

More people have lost far more money than people who have made money by trying to time the market. Nobody has ever been able to time the market successfully and consistently in multiple stock market cycles.

It would be better if you are trying to spend more time in the market than trying to time the market because even the greatest investors cannot predict when the market would rise and fall.

#6. Diversify your investments 

This old-age strategy is what made investors like Warren Buffett and Charlie Munger so successful. There is a human tendency to re-invest in stocks that have performed well in the past. However, what was a safe bet yesterday might not be a great choice in the present.

Investing in a single company or a single sector could be risky because if the company or sector doesn’t do well, it can depreciate your portfolio to a great extent. 

The best way to diversify a portfolio is to invest in a combination of small cap, medium cap and large cap stocks. This will give place to both stability and growth in your portfolio.

By diversifying your portfolio, you can spread the risk and counter the volatility of the market.

#7. Never borrow money to invest

The ability to generate returns in the stock market is greatly dependent on how long you hold your stocks. Investing using borrowed money is risky as you are bound to repay the loan on time even if your investments are not performing very well.

Always invest using surplus funds that you would not require immediately. This will ensure peace of mind as you do not have to worry about repaying lenders even if you make losses.

#8. Keep a track of your portfolio 

As a beginner, it is important to keep a track on how your investments are doing.

Depending on the performance of your portfolio, you can rebalance and shuffle your portfolio accordingly. You can always check the quarterly results of the stocks that are in your portfolio to analyze their performance.

It is also important to stay updated with policy changes and financial news on the macro level that can have an impact on your portfolio.

You can always reach out to your financial advisors to seek their help in rebalancing your portfolio.

#9. Have realistic expectations

Having realistic expectations from the start can save you from a lot of mental trouble. There’s nothing wrong with expecting your investments to perform well, but you might soon see your portfolio turning red if you have some unrealistic assumptions.

There are times when stocks generate more than 50% returns in a year during the bull run. But you cannot always expect the same kind of returns.

Earning around 15% pa from the stock market is the most ideal expectation one can have. Anything more than that is pure dumb luck. 

#10. Invest small but consistently 

If your goal is long-term wealth creation for you and your family, then it is better to invest small sums at regular intervals than investing a large sum at once. 

This is proven to be cheaper and less risky which also allows you to be more flexible with your investments. 

SIPs in equity mutual funds are a great way to achieve the goal of wealth creation in stock market if you are a novice.

Conclusion

By sticking to these basic rules of investing, you increase your chances of creating wealth in the long-term. Making money in the stock market is not about how much you know but how well you control your emotions and how disciplined you are in your approach.

Investing well is about doing the right things as much as it is about avoiding the wrong things.